Understanding political risk in investment planning

In: Journal of policy analysis and management: the journal of the Association for Public Policy Analysis and Management, Volume 3, Issue 4, p. 544-560

Abstract

AbstractIn 1982, the Congress authorized $11 billion to modernize the nation's air traffic control system—one of the largest infrastructure investments since the building of the interstate highway system. Although this investment appears to offer a large and robust return, the economic results depend strongly on productivity gains through system consolidation. It is uncertain what balance the Congress will strike between the long‐term, widely shared benefits of greater productivity and the immediate job losses from system consolidation. This risk can be included in the calculus of expected return through Monte Carlo analysis. When this is done, the expected return drops very close to the 10% hurdle rate that the government often uses for such projects. This method of integrating political risk can be applied to any investment, public or private, for which political action joins the customary economic and technical uncertainties in affecting the outcome.